Report on the. Troy University. Troy, Alabama October 1, 2004 through September 30, Filed: August 4, 2006

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1 Report on the Troy, Alabama October 1, 2004 through September 30, 2005 Filed: August 4, 2006 Department of Examiners of Public Accounts 50 North Ripley Street, Room 3201 P.O. Box Montgomery, Alabama Website: Ronald L. Jones, Chief Examiner

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3 Table of Contents Page Report to the Chief Examiner Independent Auditor s Report Management s Discussion and Analysis A E G Basic Financial Statements Exhibit #1 Statement of Net Assets 1 Exhibit #2 Statement of Revenues, Expenses and Changes in Net Assets 3 Exhibit #3 Statement of Cash Flows 4 Foundation Exhibit #4 Statements of Financial Position 6 Exhibit #5 Statements of Activities 7 Notes to the Financial Statements 9 Foundation 25 Supplementary Information 36 Exhibit #6 Schedule of Expenditures of Federal Awards 37 Notes to the Schedule of Expenditures of Federal Awards 47 Troy, Alabama

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5 Table of Contents Page Additional Information 48 Exhibit #7 Board Members and Officials 49 Exhibit #8 Exhibit #9 Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards 51 Report on Compliance With Requirements Applicable to Each Major Program and on Internal Control Over Compliance in Accordance With OMB Circular A Exhibit #10 Schedule of Findings and Questioned Costs 55 Exhibit #11 Auditee Response 58 Troy, Alabama

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7 State of Alabama Department of Examiners of Public Accounts P.O. Box , Montgomery, AL North Ripley Street, Room 3201 Montgomery, Alabama Ronald L. Jones Telephone (334) Chief Examiner FAX (334) Honorable Ronald L. Jones Chief Examiner of Public Accounts Montgomery, Alabama Dear Sir: Under the authority of the Code of Alabama 1975, Section , we submit this report on (the University ) and its component unit, the Foundation, for the period October 1, 2004 through September 30, SCOPE AND OBJECTIVES This report encompasses audits of the financial statements of the University and its component unit and a review of compliance by the University with applicable laws and regulations of the State of Alabama and federal financial assistance programs. The audit of the University was conducted in accordance with government auditing standards generally accepted in the United States of America for financial audits. The audit of the component unit was conducted in accordance with financial auditing standards generally accepted in the United States of America for financial audits. The objectives of the audits were to determine whether the financial statements present fairly the financial position and results of financial operations and whether the University has complied with applicable laws and regulations. CONTENTS OF REPORT This report includes the following segments: 1. Report to the Chief Examiner contains items pertaining to state legal compliance, agency operations and other matters. 2. Independent Auditor s Report reports on whether the financial information constitutes a fair presentation of the financial position and results of financial operations A

8 3. Management s Discussion and Analysis (MD&A) a component of Required Supplementary Information (RSI) prepared by the management of the University introducing the basic financial statements and providing an analytical overview of the University s financial activities for the year. This information is supplementary information required by the Governmental Accounting Standards Board (GASB). This information has not been audited, and as a result, no opinion is provided about the fairness of the information in accordance with generally accepted accounting principles. 4. Financial Section includes basic financial statements (Exhibits 1 through 3) of the University and (Exhibits 4 and 5) of the component unit, and Notes to the Financial Statements of the University and the component unit. 5. Supplementary Information includes the Schedule of Expenditures of Federal Awards (Exhibit 6), which details federal awards expended during the audit period and Notes to the Schedule of Expenditures of Federal Awards of the University. 6. Additional Information contains basic information related to the University (Exhibit 7) and the following reports and items required by generally accepted government auditing standards and/or U. S. Office of Management and Budget (OMB) Circular A-133 for federal compliance audits: Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance With Government Auditing Standards (Exhibit 8) a report on internal control related to the financial statements and on whether the University has complied with laws and regulations which could have a direct and material effect on the University's financial statements. Report on Compliance With Requirements Applicable to Each Major Program and on Internal Control Over Compliance in Accordance With OMB Circular A-133 (Exhibit 9) a report on the University s internal control over compliance with requirements of laws, regulations, contracts and grants applicable to major federal programs and an opinion on whether the University complied with laws, regulations, and the provisions of contracts or grant agreements which could have a direct and material effect on each major program. Schedule of Findings and Questioned Costs (Exhibit 10) a report on the University summarizing the results of the audit findings relating to the financial statements as required by Government Auditing Standards and the University s findings and questioned costs for federal awards as required by OMB Circular A-133. Auditee Response (Exhibit 11) a response by the University on the results of the audit B

9 AUDIT COMMENTS is a state supported institution of higher education operated under the direction of a Board of Trustees composed of the Governor, the State Superintendent of Education, and ten members appointed by the Governor with the advice and consent of the Alabama Senate. It is an educational institution offering associate, bachelors, masters and educational specialists degrees. AUDIT FINDINGS Cash is an account balance highly subject to errors, omissions and misstatements. As a result, strict controls over cash are critical and essential. Monthly reconciliations of bank accounts help to prevent errors and serve to safeguard public assets. A review of the initial year-end reconciled bank balances, prepared by University personnel, to year-end general ledger cash balances reflected numerous reconciling items, which should not have been included. This reconciliation was returned to University personnel. On May 5, 2006, a final revised reconciliation was received. Audit tests revealed that fifteen bank accounts were not reconciled monthly and that fourteen bank accounts were not reconciled prior to being included in the fiscal year-end financial statements of the University. According to the University s final reconcilements, cash is overstated by approximately $540,000 on the Statement of Net Assets. STATUS OF PRIOR AUDIT FINDINGS In order to have an adequate system of internal control over financial reporting and cash, procedures should be in place to investigate and clear reconciling items between the general ledger cash balance and the bank statement balance in a timely manner. Audit tests revealed that several bank account reconciliations prepared by the University contained numerous reconciling items that had not been cleared in more than a year. RECOMMENDATIONS It is recommended that: University personnel should ensure all cash accounts are reconciled to the appropriate general ledger balances monthly. Reconciliations should be completed accurately and timely. It is again recommended that: The University should implement the necessary procedures to ensure reconciling items are investigated and cleared from their bank account reconciliations in a timely manner C

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11 Independent Auditor s Report We have audited the accompanying basic financial statements of, a component unit of the State of Alabama, as of and for the year ended September 30, 2005, as listed in the table of contents as Exhibits 1 through 3. These basic financial statements are the responsibility of s management. Our responsibility is to express an opinion on these basic financial statements based on our audit. We did not audit the financial statements of Foundation, a component unit. Those financial statements were audited by other auditors whose report thereon has been furnished to us, and our opinion, insofar as it relates to the amounts included for Foundation, is based on the report of other auditors. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the basic financial statements are free of material misstatement. The financial statements of the Foundation were not audited in accordance with Government Auditing Standards. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the basic financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall basic financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, based on our audit and the report of other auditors, the financial statements referred to above present fairly, in all material respects, the respective financial position of and Foundation, as of September 30, 2005, and the respective changes in financial position, and cash flows, where applicable, thereof for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note 1 to the financial statements, has adopted the provisions of Governmental Accounting Standards Board (GASB) Statement Number 39, Determining Whether Certain Organizations are Component Units, an amendment of GASB Statement Number 14. In accordance with Government Auditing Standards, we have also issued our report dated June 6, 2006, on our consideration of s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit E

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13 Management s Discussion and Analysis (Required Supplementary Information) G

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22 Statement of Net Assets September 30, 2005 ASSETS Current Assets Cash and Cash Equivalents $ 34,459, Short-Term Investments 335, Endowment Investments 24, Deposit with Bond Trustee 1,552, Accounts Receivable, Net 31,789, Inventories 112, Security Deposits 240, Lease Receivable 6, Loans Receivable 488, Prepaid Expenses 3,620, Bond Issuance Costs 64, Total Current Assets 72,693, Noncurrent Assets Cash 34,463, Endowment Investments 4,647, Investments 1,745, Lease Receivable 113, Loans Receivable 1,732, Bond Issuance Costs 1,054, Capital Assets: Land 4,142, Improvements Other Than Buildings 4,657, Buildings 145,140, Construction in Progress 1,816, Equipment and Furniture 9,433, Assets Under Capital Lease 557, Museum Exhibits 1,685, Less: Accumulated Depreciation (56,754,653.37) Total Capital Assets, Net of Depreciation 110,677, Total Noncurrent Assets 154,435, Total Assets $ 227,128, The accompanying Notes to the Financial Statements are an integral part of this statement. Troy, Alabama 1 Exhibit #1

23 LIABILITIES Current Liabilities Funds Held for Others $ 4,968, Accounts Payable and Accrued Liabilities 8,379, Deferred Revenue 28,286, Lease Obligations 17, Notes Payable Bonds Payable 2,555, Compensated Absences 224, Total Current Liabilities 44,431, Noncurrent Liabilities Funds Held for Others 2,332, Lease Obligations 239, Bonds Payable 49,505, Compensated Absences 1,319, Total Noncurrent Liabilities 53,396, Total Liabilities 97,828, NET ASSETS Invested in Capital Assets, Net of Related Debt 59,478, Restricted for: Nonexpendable: Title III Endowment Challenge Grants 1,620, Expendable: Scholarships and Fellowships 382, Instructional Department Uses 1,937, Loans 254, Unrestricted 65,627, Total Net Assets $ 129,299, Troy, Alabama 2 Exhibit #1

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25 Statement of Revenues, Expenses and Changes in Net Assets For the Year Ended September 30, 2005 OPERATING REVENUES Student Tuition and Fees (Net of Scholarship Allowances of $9,281,671.65) $ 98,181, Federal Grants and Contracts 23,846, State and Local Grants and Contracts 4,261, Nongovernmental Grants and Contracts 684, Sales and Services of Educational Departments 5,557, Auxiliary Enterprises: Residential Life (Net of Scholarship Allowances of $961,565.89) 5,466, Bookstore (Net of Scholarship Allowances of $61,759.42) 5,834, Total Operating Revenues 143,832, OPERATING EXPENSES Instruction 61,690, Research 377, Public Service 6,188, Institutional Support 31,215, Academic Support 13,130, Student Services 12,534, Operation and Maintenance 11,685, Scholarships and Financial Aid 16,152, Depreciation 4,191, Auxiliary Enterprises: Residential Life 3,565, Bookstore 6,369, Total Operating Expenses 167,100, Operating Income (Loss) (23,268,037.47) NONOPERATING REVENUES (EXPENSES) State Appropriations 37,132, Investment Income (Net of Investment Expense of $54,850) 1,994, Interest on Capital Asset Related Debt (2,057,235.82) Other Nonoperating Revenues (Expense) (136,711.51) Net Nonoperating Revenues 36,932, Income Before Other Revenues, Expenses, Gains, or Losses 13,664, Net Assets Transferred from TSU Foundation 2,402, Changes in Net Assets 16,067, Total Net Assets - Beginning of Year, as Restated (Note 15) 113,232, Total Net Assets - End of Year $ 129,299, The accompanying Notes to the Financial Statements are an integral part of this statement. Troy, Alabama 3 Exhibit #2

26 Statement of Cash Flows For the Year Ended September 30, 2005 CASH FLOWS FROM OPERATING ACTIVITIES Tuition and Fees $ 96,499, Grants and Contracts 29,525, Payments to Suppliers (42,531,142.87) Payment to Utilities (4,251,807.63) Payments to Employees (79,624,072.61) Payments for Benefits (14,947,562.93) Payments for Scholarships (16,152,578.64) Loans Issued to Students and Employees (594,202.00) Collection of Loans to Students and Employees 492, Auxiliary Enterprise Charges: Residential Life 6,005, Bookstore 6,670, Sales of Educational Services 6,230, Change in Prepaid Expenses (567,423.46) Other Receipts (Payments) 1, Net Cash Provided (Used) by Operating Activities (13,243,736.11) CASH FLOWS FROM NONCAPITAL FINANCING ACTIVITIES State Appropriations 37,132, Security Deposits 3, Donations from Foundation 2,478, Loans (220,072.88) Agency Transactions Other Receipts (Payments) 256, Net Cash Provided (Used) by Noncapital Financing Activities 39,651, CASH FLOWS FROM CAPITAL AND RELATED FINANCING ACTIVITIES Proceeds from Capital Debt 286, Proceeds from Sale of Capital Assets 285, Purchases of Capital Assets (11,678,514.38) Principal Paid on Capital Debt and Leases (2,741,767.07) Interest Paid on Capital Debt and Leases (1,824,946.44) Bond Issuance Costs (130,283.70) Deposit with Trustee 2,571, Net Cash Provided (Used) by Capital and Related Financing Activities (13,232,669.98) CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from Sales and Maturities of Investments 188, Interest on Investments 1,403, Purchase of Investments (10,000.00) Net Cash Provided (Used) by Investing Activities 1,582, Net Increase (Decrease) in Cash and Cash Equivalents 14,758, Cash and Cash Equivalents - Beginning of Year 54,165, Cash and Cash Equivalents - End of Year $ 68,923, The accompanying Notes to the Financial Statements are an integral part of this statement. Troy, Alabama 4 Exhibit #3

27 Reconciliation of Net Operating Revenues (Expenses) to Net Cash Provided (Used) by Operating Activities: Operating Income (Loss) $ (23,268,037.47) Adjustments to Reconcile Net Operating Income (Loss) to Net Cash Provided (Used) by Operating Activities: Depreciation Expense 4,191, Changes in Assets and Liabilities: (Increase)/Decrease in Receivables, Net (4,594,611.05) (Increase)/Decrease in Inventories 1,402, Increase/(Decrease) in Accounts Payable 4,930, (Increase)/Decrease in Other Assets (666,832.99) Increase/(Decrease) in Deferred Revenue 2,896, Increase/(Decrease) in Compensated Absences 82, (Increase)/Decrease in Loans to Students and Employees (101,694.52) Increase/(Decrease) in Deposits Held for Others 1,883, Net Cash Provided (Used) by Operating Activities $ (13,243,736.11) Troy, Alabama 5 Exhibit #3

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29 Statements of Financial Position Foundation September 30, 2005 and ASSETS Cash and Cash Equivalents $ 11,784,456 $ 12,871,626 Unconditional Promises to Give 594, ,290 Investments 18,435,400 15,868,469 Notes Receivables 238, ,210 Other Receivables 103,492 41,245 Beneficial Interest in Trusts 841, ,599 Operating Assets, Net 2,751,550 2,717,559 Program Cash Held as Agent 1,650,886 1,258,014 TOTAL ASSETS 36,400,368 34,805,012 LIABILITIES AND NET ASSETS LIABILITIES Accounts Payable 557, ,927 Funds Held as Agent 1,650,886 1,258,014 Due to 152, ,746 Gift Annuity Liability 389, ,182 TOTAL LIABILITIES 2,750,045 2,390,869 NET ASSETS Unrestricted 7,594,523 7,184,591 Temporarily Restricted 14,094,211 13,297,820 Permanently Restricted 11,961,589 11,931,732 TOTAL NET ASSETS 33,650,323 32,414,143 TOTAL LIABILITIES AND NET ASSETS $ 36,400,368 $ 34,805,012 The accompanying Notes to the Financial Statements are an integral part of this statement. Troy, Alabama 6 Exhibit #4

30 Statements of Activities Foundation For the Years Ended September 30, 2005 and Temporarily Permanently Unrestricted Restricted Restricted Total SUPPORT AND REVENUE Contributions $ 97,698 $ 2,003,878 $ 29,857 $ 2,131,433 Investment Income 147,659 1,789,854-1,937,513 Affinity Card Income - 41,233-41,233 Special Event Revenue 3,013 1,433,159-1,436,172 Change in Value of Split Interest Agreement and Perpetual Trusts - (29,142) - (29,142) Other Income 17, , ,957 Net Assets Released from Restrictions: Satisfaction of Program Restrictions 5,055,843 (5,055,843) - - TOTAL SUPPORT AND REVENUE 5,321, ,391 29,857 6,148,166 EXPENSES Program Services: Athletics 1,509, ,509,686 Other Grants and Allocations 646, ,377 Total Program Services 2,156, ,156,063 Supporting Services: Management and General 180, ,382 Fund Raising 172, ,619 Total Supporting Services 353, ,001 Transfers to 2,402, ,402,922 TOTAL EXPENSES 4,911, ,911,986 CHANGE IN NET ASSETS 409, ,391 29,857 1,236,180 Transfers Net Assets at Beginning of Year 7,184,591 13,297,820 11,931,732 32,414,143 Net Assets at End of Year $ 7,594,523 $ 14,094,211 $ 11,961,589 $ 33,650,323 The accompanying Notes to the Financial Statements are an integral part of this statement. Troy, Alabama 7 Exhibit #5

31 2004 Temporarily Permanently Unrestricted Restricted Restricted Total $ 94,520 $ 1,975,625 $ 435,417 $ 2,505, ,835 1,254, ,372 1,785,822-46,469-46,469 5,337 1,263,329-1,268,666 - (22,986) 35,243 12,257 41,237 2,164,280-2,205,517 8,049,262 (8,049,262) - - 8,496,191 (1,367,930) 696,032 7,824,293 2,944, ,944, , ,817 3,820, ,820, , ,401 50, , , ,057 2,546,117 - (19,542) 2,526,575 6,584,254 - (19,542) 6,564,712 1,911,937 (1,367,930) 715,574 1,259,581 (2,007,013) 2,015,337 (8,324) - 7,279,667 12,650,413 11,224,482 31,154,562 $ 7,184,591 $ 13,297,820 $ 11,931,732 $ 32,414,143 Troy, Alabama 8 Exhibit #5

32 Notes to the Financial Statements For the Year Ended September 30, 2005 Note 1 Summary of Significant Accounting Policies The financial statements of are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The Governmental Accounting Standards Board (GASB) is the accepted standard-setting body for establishing governmental accounting and financial reporting principles. The more significant accounting policies of the University are described below. A. Reporting Entity is a component unit of the State of Alabama. A component unit is a legally separate organization for which the elected officials of the primary government are financially accountable. The Governmental Accounting Standards Board (GASB) in Statement Number 14, The Financial Reporting Entity, states that a primary government is financially accountable for a component unit if it appoints a voting majority of the organization s governing body and (1) it is able to impose its will on that organization or (2) there is a potential for the organization to provide specific financial benefits to, or impose specific financial burdens on, the primary government. In this case, the primary government is the State of Alabama and the Governor appoints s Board of Trustees. In addition, the University receives a substantial portion of its funding from the State of Alabama (potential to impose a specific financial burden). Based on these criteria, is considered for financial reporting purposes to be a component unit of the State of Alabama. B. Component Units The Governmental Accounting Standards Board (GASB) has issued Statement Number 39, Determining Whether Certain Organizations are Component Units, an amendment to GASB Statement Number 14. Statement Number 39 provides additional guidance to determine whether certain organizations for which the primary government is not financially accountable should be treated as component units based on the nature and significance of their relationship with the primary government. Generally, it requires reporting as a component unit, an organization that raises and holds economic resources for the direct benefit of a government unit. The Foundation (the Foundation ) is organized exclusively for charitable, scientific and educational purposes for the benefit of the University. Because of the significance of the relationship between the University and the Foundation, the Foundation is considered a component unit of the University. The Foundation s financial statements and accompanying notes are reported separately because of the difference in the reporting model for the Foundation. The Foundation follows the Financial Accounting Standards Board (FASB) rather than the Governmental Accounting Standards Board (GASB). As a result, certain revenue recognition criteria and presentation features are different from GASB revenue recognition criteria and presentation features. No modifications have been made to the Foundation s financial statements for these differences. Troy, Alabama 9

33 Notes to the Financial Statements For the Year Ended September 30, 2005 C. Measurement Focus, Basis of Accounting and Financial Statement Presentation The financial statements of the University have been prepared using the economic resources measurement focus and the accrual basis of accounting. Revenues are recorded when earned and expenses are recorded when a liability is incurred, regardless of the timing of the related cash flows. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provider have been met. The University follows all applicable GASB pronouncements as well as the following pronouncements issued on or before November 30, 1989 unless those pronouncements conflict with or contradict GASB pronouncements: Financial Accounting Standards Board (FASB) Statements and Interpretations, Accounting Principles Board (APB) Opinions, and Accounting Research Bulletins (ARBs). It is the policy of the University to first apply restricted resources when an expense is incurred and then apply unrestricted resources when both restricted and unrestricted net assets are available. The Statement of Revenues, Expenses and Changes in Net Assets distinguishes between operating and nonoperating revenues. Operating revenues, such as tuition and fees, result from exchange transactions associated with the principal activities of the University. Exchange transactions are those in which each party to the transactions receives or gives up essentially equal values. Nonoperating revenues arise from exchange transactions not associated with the University s principal activities, such as investment income, and from all nonexchange transactions, such as state appropriations. D. Assets, Liabilities, and Net Assets 1. Deposits and Investments Cash and cash equivalents include cash on hand, demand deposits and short-term investments with original maturities of three months or less from the date of acquisition. Statutes authorize the University to invest in the same type of instruments as allowed by Alabama law for domestic life insurance companies. This includes a wide range of investments, such as direct obligations of the United States of America, obligations issued or guaranteed by certain federal agencies, and bonds of any state, county, city, town, village, municipality, district or other political subdivision of any state or any instrumentality or board thereof or of the United States of America that meet specified criteria. Investments are reported at fair value based on quoted market prices, except for money market investments and repurchase agreements, which are reported at amortized cost. Troy, Alabama 10

34 Notes to the Financial Statements For the Year Ended September 30, Receivables Accounts receivable relate to amounts due from students for tuition and fees, federal grants, third party tuition, and auxiliary enterprise sales, such as food service and residence halls. The receivables are shown net of allowance for doubtful accounts. 3. Inventories The inventories are comprised of items held for resale. Inventories are valued using the first in/ first out (FIFO) method. 4. Capital Assets Capital assets with a unit cost of over $5,000 and an estimated useful life in excess of one year are recorded at historical cost or estimated historical cost if purchased or constructed. In addition, works of art and historical treasures and similar assets are recorded at their historical cost. Donated capital assets are recorded at fair market value at the date of donation. Land and Construction in Progress are the only capital assets that are not depreciated. Depreciation is not allocated to a functional expense category. The costs of normal maintenance and repairs that do not add to the value of the asset or materially extend its life are not capitalized. Major outlays for capital assets and improvements are capitalized when projects are completed. The amount of interest to be capitalized is calculated by offsetting interest expense incurred from the date of the borrowing until completion of the project with interest earned on invested proceeds over the same period. Maintenance and repairs are charged to operations when incurred. Betterments and major improvements which significantly increase values, change capacities or extend useful lives are capitalized. Upon the sale or retirement of fixed assets depreciated using the straight-line method, the cost and related accumulated depreciation are removed from the respective accounts and any resulting gain or loss is included in the results of operation. The depreciation method used by the University is the straight-line basis. Equipment items except for vehicles are being depreciated over four years. Vehicles are depreciated over eight years. Buildings are depreciated over forty years. Improvements involving computers are depreciated over four years. Signs and buildings of a non-permanent nature are depreciated over twenty years. Other building improvements that involve landscaping items are depreciated over forty years. Troy, Alabama 11

35 5. Long-Term Obligations Notes to the Financial Statements For the Year Ended September 30, 2005 Long-term debt and other long-term obligations are reported as liabilities in the Statement of Net Assets. Bond premiums and discounts, as well as issuance costs, are deferred and amortized over the life of the bonds. 6. Compensated Absences The Board of Trustees determines annual and sick leave policies for the University s employees. The annual and sick leave policies adopted by the University are as follows: All employees earn 12 days of annual leave each year with accumulation limited to 20 days. Classified employees (non-instructional and other bi-weekly payroll employees) earn 12 days of sick leave each year with no limit on accumulation, and ten days of annual leave each year with accumulation limited to 20 days. 7. Deferred Tuition and Fee Revenue Tuition and fee revenues received but related to the period after September 30, 2005 have been deferred. 8. Net Assets Net assets are required to be classified for accounting and reporting purposes into the following net asset categories: Invested in Capital Assets, Net of Related Debt Capital assets, net of accumulated depreciation and outstanding principal balances of debt attributable to the acquisition, construction or improvement of those assets. Any significant unspent related debt proceeds at year-end related to capital assets are not included in this calculation. Restricted: Nonexpendable Net assets subject to externally imposed stipulations that they be maintained permanently by the University. Such assets include the University s permanent endowment funds. Expendable Net assets whose use by the University is subject to externally imposed stipulations that can be fulfilled by actions of the University pursuant to those stipulations or that expire by the passage of time. Troy, Alabama 12

36 Notes to the Financial Statements For the Year Ended September 30, 2005 Unrestricted Net assets that are not subject to externally imposed stipulations. Unrestricted net assets may be designated for specific purposes by action of management or the Board of Trustees. 9. Federal Financial Assistance Programs The University participates in various federal programs. Federal programs are audited in accordance with the Single Audit Act Amendments of 1996, the U. S. Office of Management and Budget Revised Circular A-133, Audits of States, Local Governments and Non-Profit Organizations, and the Office of Management and Budget (OMB) Compliance Supplement. 10. Scholarship Allowances and Student Aid Student tuition and fees are reported net of scholarship allowances and discounts. The amount for scholarship allowances and discounts is the difference between the stated charge for goods and services provided by the University and the amount that is paid by the student and/or third parties making payments on behalf of the student. The University uses the alternate method as prescribed by the National Association of College and University Business Officers (NACUBO) in their Advisory Report to determine the amount of scholarship allowances and discounts. Note 2 Deposits and Investments A. Deposits The University s deposits at year-end were held by financial institutions in the State of Alabama s Security for Alabama Funds Enhancement (SAFE) program. The SAFE Program was established by the Alabama Legislature and is governed by the provisions contained in the Code of Alabama 1975, Sections 41-14A-1 through 41-14A-14. Under the SAFE program all public funds are protected through a collateral pool administered by the Alabama State Treasurer s Office. Under this program, financial institutions holding deposits of public funds must pledge securities as collateral against those deposits. In the event of failure of a financial institution, securities pledged by that financial institution would be liquidated by the State Treasurer to replace the public deposits not covered by the Federal Depository Insurance Corporation (FDIC). If the securities pledged fail to produce adequate funds, every institution participating in the pool would share the liability for the remaining balance. Troy, Alabama 13

37 Notes to the Financial Statements For the Year Ended September 30, 2005 The remaining portion of the University s deposits was held by financial institutions in other states. The total bank balance is categorized as follows: Amount of funds held by financial institutions participating in the SAFE Program. $74,180, Amount insured by the FDIC or collateralized with securities held by the pledging financial institution s trust department in the University s name. 4,139, Total Bank Balance $78,320, B. Investments Investments, as shown on the Statement of Net Assets, include non-negotiable certificates of deposit in the amount of $1,209,409; however, they are considered deposits in the context of this disclosure and are not subject to risk categorization. The University s formally adopted investment policy is as follows: Because of the diverse nature of the funds coming under the management and control of the Board and the corresponding operational needs of the University, the policies and practices hereinafter set forth necessarily separate funds into two investments categories; that are Operational Fund Investments consisting of relatively short-term investments and Permanent Fund Investments which consists of relatively longer term investments. Operational Fund Investments are applicable to the following fund groups: A) Current funds B) Loan funds C) Agency funds D) Plant funds The Chancellor or his designee shall be responsible for the direct investment and administration of Operational Fund Investments; however, such investments shall be limited to the following marketable securities: A) Direct obligations of the United States of America of obligations unconditionally guaranteed as to the principal and interest by the United States of America. B) Obligations of any agency or instrumentality of the United States of America. C) Repurchase agreements secured by the U. S. Government and Agency obligations. D) Shares in externally managed money-market funds, specifically approved by the Board. E) Certificates of deposit with commercial banks secured as required and approved as depositories by the Board. Troy, Alabama 14

38 Notes to the Financial Statements For the Year Ended September 30, 2005 The maturity range of Operational Fund Investments shall be consistent with liquidity requirements of the funds in this category. However, funds established under certain debt instruments, may be invested in accordance with the applicable criteria. Permanent Fund Investments are applicable to the following fund groups: A) Endowment (including funds functioning as endowment). B) Life income and annuity funds. The Chancellor or his designee shall be responsible for the direct investment and administration of the several categories of Permanent Fund Investments; however, unless otherwise restricted by the donor, such investments shall be limited to the same marketable securities allowable for Operational Fund Investments. All funds are to be invested in accordance with the above criteria unless there are specific restrictions placed on individual investments by external donors. In such cases, these funds shall be separately invested in accordance with the restrictions set forth by the donor. As of September 30, 2005, the University had the following investments. Investment Type Fair Value No Maturity U. S. Agencies Federal National Mortgage Association $ 3,246 $ $ $3,246 $ $ Federal Home Loan Mortgage Corporation 17,621 17,621 Federal Home Loan Mortgage Corporation Strips 3,351 3,351 Annuity Fund 225, ,290 Mutual Funds 4,647,248 4,647,248 Stocks 646, ,238 Total $5,542,994 $ $17,621 $3,246 $3,351 $5,518,776 Interest Rate Risk Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. The University does not have a formal investment policy that limits investment maturities as a means of managing its exposure to fair value losses arising from increased interest rates. Credit Risk Credit risk is the risk that an issuer or other counterparty to an investment will not fulfill its obligation. The University does not have a formal investment policy that limits its investments to a particular rating. Custodial Credit Risk For an investment, this is the risk that, in the event of the failure of the counterparty, the government will not be able to cover the value of its investments or collateral securities that are in the possession of an outside party. The University has no formal policy that limits the amount of securities that can be held by counterparties. Troy, Alabama 15

39 Notes to the Financial Statements For the Year Ended September 30, 2005 Concentration of Credit Risk Concentration of credit risk is the risk of loss attributed to the magnitude of a government s investment in a single issuer. The University does not have a formal investment policy which is limits investment in any one issuer to less than 5%. At September 30, 2005, the University s investment in SunLife Corporation Stock constituted 11.66% of the University s investment portfolio. Foreign Currency Risk The risk that changes in exchange rates will adversely affect the fair value of an investment. Exposure to foreign currency risk was limited to investment in SunLife Corporation Stock in the amount of $646,238. For the University Trustee that Holds Bond Funds At September 30, 2005, the University had $1,552, in accounts administered by its bond trustee. In accordance with the covenants of the University s Revenue Bonds, the trustee is permitted to invest these funds in direct general obligations of the United States or securities the payment of which is unconditionally guaranteed by the United States. The balance on deposit with the trustee at September 30, 2005, was invested in the trustee s Treasury Money Market Fund (the Fund ), an external investment pool. The Fund s investments consist primarily of U. S. Treasury obligations. The Fund is consistently rated AAA by Standard & Poor s. Interest rate risk is the risk that changes in interest rates will adversely affect the fair value of an investment. As a means of limiting its exposure to fair value losses arising from rising interest rates, the Fund maintains an average maturity of 60 days or less. Note 3 Capital Assets Capital asset activity for the year ended September 30, 2005, was as follows: Beginning Balance Additions Deductions Reclassifications and Adjustments Ending Balance Land $ 4,140, $ 177, $ 175, $ $ 4,142, Buildings 128,626, , ,555, ,140, Improvements Other Than Buildings 4,368, , ,657, Equipment 9,400, ,114, ,156, , ,433, Leased Assets 487, , , , Museum Exhibits 1,685, ,685, Construction in Progress 9,002, ,658, (16,844,830.91) 1,816, Total 157,711, ,036, ,390, , ,431, Less: Accumulated Depreciation Buildings 44,974, ,043, , ,975, Improvements Other Than Buildings 1,170, , ,277, Equipment 7,423, , ,151, (1,758.46) 7,269, Museum Exhibits 189, , , Total Accumulated Depreciation 53,758, ,191, , (1,758.46) 56,754, Capital Assets, Net $103,953, $ 6,844, $ 196, $ 76, $110,677, Troy, Alabama 16

40 Notes to the Financial Statements For the Year Ended September 30, 2005 Note 4 Receivables Receivables are reported net of uncollectible amounts and are summarized as follows: Accounts Receivable Federal $ 1,921, State 27, Foundation 632, Third Party Sponsors 13,406, Less: Allowance for Doubtful Accounts (858,082.92) Total Accounts Receivable 15,129, Student Receivables Current 23,260, Less: Allowance for Doubtful Accounts (6,601,414.74) Total Receivables $31,789, Note 5 Construction and Other Significant Commitments The University is in the process of completing improvements on the track on the Troy campus. The costs to complete this project are $445,000. The Montgomery campus has begun renovations on the Davis Theatre. Costs to complete the renovations are $260,000. Note 6 Accounts Payable Accounts payable and accrued liabilities represent amounts due at September 30, 2005 for goods and services received prior to the end of the fiscal year. Salaries and Wages $ 193, Benefits 2,745, Supplies 3,048, Sales and Other Taxes 738, Student and Auxiliary Services 1,496, Due to Grantor 13, Other 143, Total $8,379, Troy, Alabama 17

41 Note 7 Lease Obligations Capital Leases Notes to the Financial Statements For the Year Ended September 30, 2005 The University is acquiring equipment under lease agreements, which provides for the University to purchase the equipment over a period of years. Minimum lease payments under capital leases together with the present value of the net minimum lease payments are shown in the table below: Fiscal Year Equipment $ 28, , , , , , , , , , , , , , , , , , , , Minimum Lease Payments 357, Less: Interest 100, Present Value of Minimum Lease Payments $257, Troy, Alabama 18

42 Note 8 Long-Term Liabilities Notes to the Financial Statements For the Year Ended September 30, 2005 Long-term liabilities for the year ended September 30, 2005, was as follows: Beginning Balance Additions Reductions Adjustments Ending Balance Current Portion Lease Obligations $ 207, $ 85, $ 35, $ $ 257, $ 17, Notes Payable 286, , Revenue Bonds 53,695, ,270, ,420, (7,485,000.00) 52,060, ,555, Total Leases, Notes and Bonds 54,188, ,355, ,741, (7,485,000.00) 52,317, ,572, Other Liabilities Compensated Absences 1,460, , ,543, , Total Long-Term Liabilities $55,649, $8,438, $2,741, $(7,485,000.00) $53,860, $2,796, The Revenue Bonds were issued in 1998, 2001, 2002, 2003, 2004 and 2005 by the Board of Trustees to provide funds for construction and renovation of various capital projects. A trustee holds sinking fund deposits, including earnings on investments of these deposits. Revenue from student tuition and fees sufficient to pay the annual debt service are pledged to secure the bonds. Principal and interest maturity requirements on bond debt are as follows: Fiscal Year Principal Interest Total $ 2,555, $ 1,956, $ 4,511, ,675, ,869, ,544, ,770, ,781, ,551, ,715, ,689, ,404, ,915, ,593, ,508, ,010, ,487, ,497, ,135, ,369, ,504, ,285, ,240, ,525, ,635, ,122, ,757, ,755, ,017, ,772, ,895, , ,798, ,035, , ,813, ,665, , ,321, ,805, , ,342, ,235, , ,665, ,600, , ,949, ,705, , ,984, ,290, , ,507, ,375, , ,539, , , ,009, , , ,044, ,035, , ,082, ,120, , ,126, Total $52,060, $19,702, $71,762, Troy, Alabama 19

43 Notes to the Financial Statements For the Year Ended September 30, 2005 The University incurred bond issuance cost upon issuance of its 1998, 2001, 2002, 2003, 2004 and 2005 Series Tuition Revenue Bonds and Alabama Higher Education Equipment Loan Authority Notes. The issuance cost is being amortized using the straight-line method. Total Bond Issuance Cost $1,577, Amount Amortized-Prior Years (410,791.22) Sub-Total Issuance Costs 1,166, Amount Amortized - Current (60,296.88) Removed for 1999 Bonds (167,649.71) Added for 2005 bonds 179, Balance Bond Issuance Costs 9/30/2005 $1,118, Defeased Debt On May 1, 2005, the University issued revenue bonds with an interest rate varying from 3% to 4% to advance refund the 1999 revenue bonds with an interest rate varying from 3.75% to 5.5%. The net proceeds from the issuance of the 2005 revenue bonds were used to purchase U. S. government securities. These securities were deposited in an irrevocable trust with an escrow agent to provide future debt service requirements until maturity. As a result, the revenue bonds were considered to be defeased and the liability for these bonds has been removed. The advance refunding resulted in a difference between the reacquisition price and the net carrying amount of old debt of $389,058. The difference is being netted against the new debt and amortized over the remaining life of the old debt which is shorter than the life of the new debt issued. As a result of advance refunding, the University reduced its total debt service requirements by $44,975.00, which resulted in an economic gain of $350, Prior Year Defeasance of Debt In prior years, the University defeased certain revenue bonds by placing the proceeds of the new bonds in an irrevocable trust to provide for all future debt service payment of the old bonds. Accordingly, the trust account assets and the liability for the defeased bonds are not included on the University s financial statements. At September 30, 2005, a total of $4,705,000 of bonds outstanding is considered defeased. Troy, Alabama 20

44 Note 9 Conduit Debt Obligations Notes to the Financial Statements For the Year Ended September 30, 2005 The University has issued Special Limited Obligation Revenue Bonds Series 1997 to provide athletic facility improvements for Sartain Hall and Memorial Stadium. The bonds are limited obligations of the City of Troy and are payable entirely from the amounts received under the bond indenture. The bonds do not constitute a debt or pledge of the faith and credit of Troy University, and accordingly, have not been reported in the accompanying financial statements. has procured a policy of municipal bond insurance securing payment of debt service on the $4,400, Troy State University Special Limited Obligation Revenue Bonds, Series 1997 from MBIA Insurance Corporation. The total amount of outstanding conduit debt as of September 30, 2005, was $3,785, In addition, the City of Troy refinanced the 1997 Bond Issue on December 1, The new amount of bonds outstanding is $4,820,000. received $600,000 that will be used to renovate the University s baseball stadium. Note 10 Defined Benefit Pension Plan A. Plan Description contributes to the Teachers Retirement System of Alabama, a cost-sharing multiple-employer public employee retirement system for the various state-supported educational agencies and institutions. This plan is administered by the Retirement Systems of Alabama. Substantially all employees of are members of the Teachers Retirement System. Membership is mandatory for covered or eligible employees of the University. Benefits vest after 10 years of creditable service. Vested employees may retire with full benefits at age 60 or after 25 years of service. Retirement benefits are calculated by two methods with the retiree receiving payment under the method which yields the highest monthly benefit. The methods are (1) Minimum Guaranteed, or (2) Formula, of which the Formula method usually produces the highest monthly benefit. Under this method retirees are allowed % of their average final salary (best three of the last ten years) for each year of service. Disability retirement benefits are calculated in the same manner. Pre-retirement death benefits in the amount of the annual salary for the fiscal year preceding death are provided to plan members. The Teachers Retirement System was established as of October 1, 1941, under the provisions of Act Number 419, Acts of Alabama 1939, for the purpose of providing retirement allowances and other specified benefits for qualified persons employed by state-supported educational institutions. The responsibility for general administration and operation of the Teachers Retirement System is vested in the Board of Control (currently 14 members). Benefit provisions are established by the Code of Alabama 1975, Sections through , as amended, and Sections 36-27B-1 through 36-27B-6, as amended. Troy, Alabama 21